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How much is pollution costing China's economy?

Pollution issues took center stage at China's recent National People's Congress, with Beijing pledging to come to grips with the problem. But how is this affecting the economy? DW speaks to the ADB's Qingfeng Zhang.

"The Chinese government is determined to tackle smog and pollution," said Premier Li Keqiang after the conclusion of the National People's Congress on March 15, adding that the government would work to fully implement the amended Environmental Protection Law, which allows for greater fines against polluters and has drawn praise from environmental advocates.

However, Li stated, "the progress we have made still falls short of the expectations of our people." Last year, the premier had declared "war on air pollution." But one year on, analysts say there are few signs of progress as recently collected data show only little improvement in air quality in China's northern cities. Moreover, nearly 60 percent of the country's underground water is polluted, according to state media.

In this context, the Asian Development Bank (ADB) recently released a report urging the Chinese authorities to initiate comprehensive fiscal, economic, and legal measures to achieve the country's ecological progress objectives.

In a DW interview, the ADB's environment expert Qingfeng Zhang outlines the impact pollution is having on China's agricultural sector, talks about the damage cost of air and water pollution for the economy, and explains how a more effective environment tax could help.

DW: According to your report's findings, how much is pollution costing the Chinese economy every year?

Qingfeng Zhang: Environmental pollution carries a significant economic cost to society. In the report, we reviewed a number of estimations on pollution cost and compared these figures with other countries. Estimates from the Ministry of Environmental Protection (MEP) indicated that in 2008, the damage cost of air and water pollution accounted for three percent of GDP when calculated on a human-resources basis, and six percent of GDP when calculated on a "willingness-to-pay" methodology, which is the maximum amount an individual is willing to sacrifice to procure a good or avoid something undesirable.

A more recent assessment carried out by Chinese Academy of Science took account not only of air and water pollution, but also of resource consumption and ecological degradation. The estimated total resource and environmental costs amounted to 13.5 percent of GDP in 2005. The figure is considerably higher than that of the United States, the United Kingdom, Germany, Japan, and other developed economies and on par with countries such as Mexico, Ghana, and Pakistan.

Data on the public-health toll of China's pollution paint a devastating picture. According to a global burden of disease study, air pollution contributed to 1.2 million premature deaths in China in 2010.

Which economic sectors are among the most affected?

Agriculture, meaning food security and safety, are among the most affected economic sectors. Acid rain is a costly by-product of China's air pollution, which can cause crop damage and deforestation in addition to structural damage to buildings and harm to human health.

Moreover, water pollution exacerbates water shortages. In many rural areas of China, agricultural lands received water so polluted that it was unfit for use, leading to significant loss of grain production. And then there is soil pollution which not only threatens the food supply and safety, but also endangers the public health, and damages the ecological system in some regions.

You also call for the introduction of a more effective environment tax. What should the tax include?

In recent policy recommendations for the 13th Five Year Plan on Environmental Protection, we proposed that the government should prioritize environmental taxes in its tax reform agenda and progressively green its tax system. For instance, we urge the government to take pilot emission taxes on major pollutants such as sulfur dioxide (SO2), nitrogen ocide (NOx), and wastewater in selected areas, and extend them to cover all pollutants when the plan is formally introduced nationwide.

Second, we urge the government to extend the value-based natural resource tax to coal and other resources and raise the tax rates gradually. Third, Beijing should increase fuel tax rates to address the impacts associated with vehicle driving, which include air pollution, urban congestion, traffic modality, and reliance on oil import.

In addition, cities with serious congestion problem can introduce congestion taxes to alleviate congestion and reduce vehicle emissions at the same time. Fourth, emission tax rates should be adjusted to provide proper incentives for the firms to abate pollution. Fifth, increase water tariffs, sewage charges and garbage disposal fees to encourage households to use resources more efficiently.

What other economic and legal measures should the Chinese authorities adopt to achieve the country's environmental objectives?

We propose a wide range of programs and policies that will help improve environmental quality despite new and emerging sources of pollution and challenges to natural resources management. For instance, we urge the government to reform the pricing of resources and introduce a green taxation system that will impose taxes for resource extraction, pollutant emissions, including carbon dioxide (CO2) discharge, and allow tax deductions to offset investments in pollution control equipment.

Qingfeng Zhang: 'Acid rain is a costly by-product of China's air pollution'

Moreover, fiscal reform should accompany these economic incentives to recycle new revenue or savings from environmental taxes to the sub-provincial governments in a way that encourages their investment in further environmental protection and resources conservation.

The government is also encouraged to invest in natural capital and establish a national regulatory framework of "eco-compensation," an initiative where the government pays for ecological services protection by households, communities or local governments.

How long will it take for China to tackle its pollution woes?

In essence, the report concluded that, while some improvements in some indicators are made each year, the situation in general is not yet under control, and it is unlikely that truly comprehensive improvements in ambient environmental quality will be achieved until 2030.

Qingfeng Zhang is an environment expert and director of the East Asia department's natural resources and agriculture division at the Asian Development Bank (ADB).